TAX LEGISLATION- An Overview Of The Capital Gains Tax Act

TAX LEGISLATION- An Overview Of The Capital Gains Tax Act

The Capital Gains Tax Act contains comprehensive guidelines on how Capital Gains should be taxed. It also included the terms, conditions, and clauses attached to their taxation. It is made up of 47 sections, with subsections embedded in them. It is however improper for us to give you an insight into the Capital Gains Tax Act without giving you a synopsis of what Capital gains tax means. Capital gains tax is the tax you are mandated to pay on the profit you receive when you sell an asset or investment. The Capital Gains Tax Act is a tax compliance drawn up by the Federal Inland Revenue Service. It is an Act established to provide for the taxation of capital gains accruing on disposal of assets. It was enacted by Act No. 44 of April 1, 1967, and last amended by Act No. 45 of 1999. According to Section 2 Subsection 1 of this Act, the rate of capital gains tax is set at ten percent of the profit made from assets disposal. A capital gains tax event includes but are not limited to when:

an individual sells an asset, such as a house.

an individual sells an investment, for example, shares

an individual makes an in-specie contribution to his/her super fund.

shares an individual owns are redeemed, cancelled, surrendered or are considered valueless by a liquidator.

an individual receives a payment from a company as a shareholder (not a dividend).

an individual gives away, losses or destroys an asset, resulting in a capital gain or a capital loss.

It is worthy of note to state that the Capital Gains Tax Act is not limited only to disposal of assets situated inside Nigeria, but also disposal of assets situated outside Nigeria. Section 4 of this Act underlines the compliance involved in the taxation of capital gains situated outside Nigeria. This section states that a disposal would be taxed where the disposal of assets is by an individual who is temporarily in Nigeria for a purpose, stays in Nigeria for the sum of a period exceeding 182 days in that same year.

Section 11 of this Act gives us a clear understanding of how this Capital gain is being computed for taxation. It is calculated as the difference between your capital proceeds and your “cost base”, which is the initial amount you paid for your capital gain asset, plus expenditure incurred on acquiring, holding, and disposing the asset.

Section 26 to Section 42 of this Act however stipulates conditions where certain capital gains are exempted from taxation. These Capital Gains Tax compliance exemptions includes but are not limited to the following:

Gains of ecclesiastical, charitable, or educational institution of a public character are exempted from taxation.

Gains of any statutory or registered friendly society are exempted from taxation.

Gains of any co-operative society registered under the Co-operative Societies Law of any State in the country is exempted from taxation.

Gains of any trade union registered under the Trade Unions Actis exempted from taxation.

Gains acquired from the sale of old business assets, whose proceeds are used to procure new and similar business assets.

For an indepth knowledge on the provisions of this Act, a copy of the Act has been made available for you to peruse at your own leisure. Download the PDF format of the Act via the link below. – Capital Gains Tax Act (Pdf)

Share the Post

About the Author

Abdul-Wahhab Ibrahim is a Director/Partner at PML Advisory, has expertise in audit, taxation and International Financial Reporting Standards (IFRS).
He previously worked as Finance Director at Spartkwest Steel, Head of audit at Westcom Technologies and Energy Services limited. He trained at KPMG and Deloitte.
Abdul –Wahhab has a Bachelor degree in Accounting from the Bayero University Kano and also an Associate Member of the Institute of Chartered Accountants of Nigeria (ACA) and an Associate Member of Chartered Institute of Taxation.

Contact Us

TAX LEGISLATION- An Overview Of The Capital Gains Tax Act

Implications of Non-Compliance under the revised Income Tax (Transfer Pricing) Regulations, 2018 The Federal Inland Revenue Service (“FIRS” or the “Service”) recently published the revised Income Tax (Transfer Pricing) Regulations, 2018 (the “Regulations”) with commencement date on 21st day of March, 2018 and will be applied to the basis periods of the connected persons beginning after the effective date of the Regulation. The Regulation repeal the Income Tax (Transfer Pricing) Regulations, 2012. This exercise is in line with the power conferred with the Service by the provision of Section 61 of the Federal Inland Revenue Service (Establishment) Act, 2007
This articles mainly examined the implication of non-compliance with the Regulations and the need for Multinational Enterprises (“MNEs”) and Local Entities (“LEs”) with connected persons and controlled transaction in their company to proactively install compliance measures so as not to negatively impact their business.
The taxation landscape is rapidly changing globally and Nigeria tax system is not an exception, taxation is indeed not a business as usual and It has been proved that the first phase of tax planning is tax compliance (i.e. to comply with the relevant provisions of the legislations and regulations) while order measures proffered still need to be complied with, this is to avert or mitigate the cost of non-compliance.
Transfer pricing generally called “TP” has also been the major interest of the FIRS in pursuit of revenue generation. TP is not illegal. What is illegal is transfer mispricing, also well-known as transfer pricing manipulation. Transfer pricing is one of the most imperative issues in international tax. Hence, the affected entities are expected to make TP a major area of priority.
The new Regulations substitute the term “connected taxable person” with “connected person” which means persons are deemed connected where one person has the ability to control or influence the other person in making financial, commercial or operational decisions, or there is a third person who has the ability to control or influence both persons in making financial, commercial or operational decisions. While “controlled transaction” means a commercial or financial transaction between connected persons.
The TP Regulations expand the scope of application, which includes Person Income Tax Act, Company Income Tax Act, Petroleum Profit Tax Act, Capital Gain Tax Act, and Value Added Tax Act, this shall be applied to controlled transaction between connected persons.
The followings are the non-compliance issues a connected person with controlled transactions may encounter;

Regulations

TP Offense (Default)

Administrative Penalties

Comments

13

Failure to file TP declaration form within 18 months after the date of incorporation or 6 months after the end of the accounting year, whichever is earlier.
Failure to file updated TP declaration form or provide notification about director of the connected person within 6 months after the end of the accounting year in which the event occurred.

Upon default, shall be liable to pay N10,000,000 for the first month of default, and
N10,000 for every day in which the failure continues.
Upon default, shall be liable to pay N25,000 for every day in which the failure continues.

New business incorporated with group structure or arrangement with connected person whether resident in Nigeria or elsewhere are required to make declaration.
Existing business are required to make an updated declaration upon merger or sale or acquisition up to 20% or with changes in the structure, arrangement or circumstances that influences connected or not connected to the entity. Also, where there is an appointment or retirement of a director of the connected person.

14

Failure to file TP disclosure form
(Non-disclosure of TP transactions) within 6 months after the end of each year or 18 months after the date of incorporation, whichever is earlier.
Incorrect disclosure of controlled transactions.

Upon default, shall be liable to pay the higher of:
N10,000,000 or 1% of the value of the controlled transaction not disclosed, for the first month of default, and
N10,000 for every day in which the failure continues.
Upon default, shall be liable to pay the higher of:
N10,000,000 or 1% of the value of the controlled transactions incorrectly disclosed.

Connected person shall without notice or demand make annual disclosure (voluntary disclosure) of transactions for each year of assessment as may be prescribed by the FIRS from time to time.
Connected persons are expected to disclose their controlled transaction to reflect the arm’s length principle.

16

Failure to file TP document within 21 days of receiving a request (Notice) from the Service.

Shall be liable to pay the higher of:
N10,000,000 or 1% of the total value of all controlled transactions, and
N10,000 for every day in which the failure continues.

Connected person are required to prepare and maintain master file and local file in the course of controlled transaction as part of their TP documentation as specified in the schedule to the Regulations.

17

Failure to furnish information or document within the required time specified in a notice.

Shall be liable to pay 1% of the value of each controlled transactions for which the information or document was requested, in addition to
N10,000 for each day in which the failure continues

It is pertinent to note that connected person with the value of controlled transactions of less than N300,000,000 may choose not to maintain TP documentation as specified in Regulation 16. However, upon request, they must prepare and file TP documentation within the 90 days of receipt of such notice.

Where the connected persons partake in transfer mispricing issues (i.e. TP manipulation) regarding controlled transactions, the FIRS may notwithstanding the aforesaid administrative penalty, carry out TP adjustment on such controlled transaction based on transaction by transaction basis to reflect the arm’s length principle. Hence, penalty and interest may apply on the resultant adjusted amount.
It is imperative to note that, the above TP offenses stipulated under Regulation 13, 14, 16 and 17 are subject to the provision of Regulation 15 of the Regulations which state that the connected person may apply in writing for extension of period for making declarations or disclosure within which to comply with the provisions of regulation provided that, the application must have being submitted before the expiration of the time stipulated and the applicant must shows good cause for its inability to comply with the stipulated submission dates. Where the taxable person (applicant) fails to meet with the extended submission date (agreed date), the administrative penalty shall apply upon default as if no extension of period was granted.
Conclusion
The revised Regulations bring to light those grail areas in the old Regulation, related entities are expected to perform TP evaluation to enable them determine the non-compliance area of emphasis to their business while those with low TP compliance should update their compliance status as the cost may grossly impact their business. We belief, the FIRS will issue circular to this effect to provide guideline on the implementation of the Regulations.
For further information or clarification on the foregoing, please contact: Christopher Ugwunwa ([email protected]) or Abiola Fajimi ([email protected]) with the subject: Implication of Non-Compliance under the Revised TP Regulation.